Not only is economics rarely a question of black and white (unless combined to make grey) but more often than not, the key colour is red. Writes Dr Hale from the depths of a New England winter:
“Now that the twin fiscal and trade surpluses of which the late Néstor Kirchner liked to boast over a decade ago have turned into twin deficits (for which the Kirchners can take much of the credit), I’d like to focus on that today since I’m not really seeing any game-changers in this year’s news so far. And rather more on the word ‘twin’ than the word ‘deficit’ and rather more on the trade than the fiscal. People talk glibly about twin deficits or surpluses but they are not really twins at all – certainly not identical twins. Given the national sense of entitlement, a chronic fiscal deficit seems the most natural thing in the world – few living memories will be able to recall more than about five years of a Treasury in the black. By way of contrast, Argentina ought to be ‘condemned to success’ in terms of its balance of trade – a huge, well-endowed country with a small, middle-income population should not be posting a record 2017 trade deficit of an estimated US$9 billion, which should take some explaining.”
“You’re right about one deficit being stranger than the other. If we go back to the first years of the current period of democracy, the 1980s, you will find that the equation of natural resource wealth and a stunted domestic market (further limited by the dominance – with rare intervals – of obsessive import substitution policies during some eight decades) resulted in exports virtually trebling imports within a modest trade volume amounting to a single-digit percentage of the economy (figures like US$12 billion exports and US$4 billion imports).
“Yet not only is Argentina’s trade deficit historically anomalous but also it presents some acute structural imbalances. A trade deficit is always by definition a case of a country importing more than it exports but if you dig deeper into most countries, you will not find much more to it than that – for whatever reason they import more than they export year in, year out everywhere around the world. But Argentina’s trade deficit is extremely lopsided – the traditional surplus pattern of mediocre export levels and minimal imports (which do not encourage trade) continues to prevail with most countries but is more than counterbalanced by huge deficits approximating the global total with the two main trading partners, Brazil and China.
“The other main culprit for the trade deficit is energy and this is even more unnatural – almost entirely the consequence of populist pricing for over a decade within a paradigm of consumer-led over export-led growth. Paradoxically enough, import substitution policies – seeking to counter costly labour and deficient infrastructure with cheap energy – have served to create a vast import need where none existed before.
“If we look at the trio of factors largely responsible for the trade deficit (Brazil, China and energy), all of them look reversible in future – the question is when. The reasons for expecting a moderation of China’s multi-billion surplus have little enough to do with Argentina – a global and presumably gradual shift toward a consumer society on the part of the world’s leading industrial producer.
“If Argentina posted a record trade deficit last year, Brazil was breaking records in the opposite direction – a whopping surplus of over US$67 billion. These two extremes should start to converge this year. The trade performances were in inverse proportion to economic growth in the two countries – Argentine growth roughly trebled Brazilian last year, thus permitting more generosity to import from the giant neighbour. The auto pact has been an especially striking example of this with Argentine purchases of Brazilian vehicles dramatically exceeding the reverse – indeed cars do not rank far behind fuel as contributors to the trade deficit. But Brazilian recovery should even the balance now – tellingly, Brazil’s imports even rose last year despite the bumper surplus as minimal growth replaced a two-year recessive streak with contractions of over three percent in each year.
“Yet while there may be a certain inevitability to adverse trade balances with such heavyweights as China and Brazil, Argentina’s energy deficit is a complete absurdity and that is where the most momentous change can be expected. The vast Vaca Muerta shale reserves are the potential game-changer here – if Argentina currently imports 30 percent of its gas needs after populist pricing discouraged any development for over a decade, Vaca Muerta could fully supply the country for three centuries at current levels of consumption. An environmentalist might argue that humanity does not have three centuries to end its dependence on fossil fuels if the planet is to survive but natural gas seems the best bet for the transitional decades (which could be as long as half a century) until renewable energy can meet all needs.
“Nor would these reserves last three centuries if Argentina reverted to being a gas exporter, supplying neighbours such as Brazil, Chile and Uruguay without comparable resources. Yet obviously there cannot be either exports or import substitution without production and these will depend on international price trends and on whether these will prompt sufficient levels of investment (sums of up to half a trillion dollars have been mentioned) to make Argentina’s energy industries competitive. But it might not be excessively optimistic to forecast that energy imports could be phased out within as little as five years (i.e. with Mauricio Macri still president, assuming that he clinches re-election next year) even with an initial development of Vaca Muerta. Yet self-sufficiency would not necessarily make more economic sense than export priorities since Argentina’s domestic household consumption is so seasonally limited to a couple of winter months.
“Last but not least, should Vaca Muerta’s potential be fully tapped and transformed into a gold-mine, would such windfalls necessarily be a good thing for Argentina – would this country then give the world a new example of ‘Dutch disease’ en route to becoming South America’s next Venezuela or would it use the hundreds of billions of dollars prudently for anti-cyclical funds like Norway? If energy self-sufficiency does arrive around 2023 and if that year does indeed define Macri’s succession, that might well become a political as much as an economic question.”